Euro hit by chatter, rumours and scare mongering over Greexit possibilities

by Mike Jones

NZD

The NZD was the strongest performing currency last week, managing to hold steady against a broad strengthening in the USD.

Last week was dominated by chatter, rumours, and scare-mongering over the chances of a Greexit. As markets moved to price in a reasonable probability of such, sentiment towards the EUR was dealt a swift blow.

Generalised EUR selling saw the EUR/USD dragged to 21 month lows, while NZD/EUR climbed from around 0.5900 to almost 0.6050.

The NZD/USD managed to escape most of the carnage, consolidating in a 0.7470-0.7670 range for most of the week. Rather than any improvement in NZD fundamentals, this more reflected the fact the currency had become a little oversold, and speculative accounts were already ‘short’.

Indeed, the latest IMM data shows the speculative community slashed exposures to the NZD last week. Their aggregate net long position was flipped into a net short (-1.5k contracts) for the first time since March 2011.

There is a reasonable smattering of NZ data to keep an eye on this week. The fulcrum will be Thursday’s NBNZ business survey. We are looking for the survey to peel back a bit from levels consistent with 4-6% NZ GDP growth (as if).

Elsewhere, the Q1 OTI data will likely confirm NZ’s terms of trade have come further off the boil (we’re picking -4.0%q/q). And Friday afternoon’s ANZ commodity export price index should highlight further falls in Q2, with its world price index down about 6% for May.

Nonetheless, for the NZD, Europe will remain the focus early in the week (later on US data may creep into the spotlight). The Greek prognosis and associated potential for contagion is the dominant focus for markets. But, as we noted in a strategy note last week, the uncertainty here is simply too great to make a call on. However, we do know that global risk aversion can worsen from here and NZ dollar fundamentals and valuation metrics present no impediment to further downside.

All of this leaves us with a view that the NZD/USD has further to fall. However, in the short-term, a squaring of the speculative community’s net short position could result in a spurt higher. Overall, we suspect bounces above 0.7650 will be met with strong selling interest. Initial support is eyed at 0.7460.

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Majors

The USD strengthened against most of the major currencies on Friday. However, the approach of tonight’s US Memorial Day holiday kept volumes fairly light.

Generalised EUR selling was the most notable feature of the night. News the Spanish region of Catalonia had asked for a bailout weighed on the single-currency, as did chatter the reported bailout cost of Bankia (Spain’s 3rd largest bank) had increased from €4.5b to €19b.

From an overnight high of almost 1.2600, the EUR/USD soon skidded back to around 1.2520. Real money buying of NZD/EUR and AUD/EUR at the ECB fix also provided headwinds for the single-currency.

Later in the night, an encouraging reading of the US Michigan consumer confidence survey (79.3 vs. 77.8) helped soothe investor nerves. Nonetheless, sentiment ended the week on a dour note, with the major US stocks indices down 0.2-0.6%.  

For this week, risk appetite is starting out on a better footing on renewed hope Greece may yet remain in the EMU.

All five Greek political polls released on Saturday showed the pro-bailout New Democracy Party ahead of the far left anti-bailout party SYRIZA.

This should support the EUR and risk assets for now. But there is still a long way to go before the June 17 Greek election and we are likely to see much more political wrangling and uncertainty in the lead up. Markets don’t like uncertainty, so expect risk appetite to remain subdued.

European headline watching is likely to remain the order of the day early in the week. ECB head Draghi and Italian PM Monti are due to speak. However, later in the week, the focus is likely to go back on relative economic performance.

It’s a busy week for US data in particular with pending home sales, Q1 GDP, and ISM manufacturing and non-farm payrolls data due on Friday.

We suspect this week’s US data will remain indicative of modest US growth. In contrast, Friday’s European PMIs are likely to be weak, if last week’s Flash estimates were anything to go by.

With relative growth favouring the US, and the chances of ECB easing rising (markets now price a 20% chance of a cut next meeting), we expect the EUR/USD to remain under pressure in coming weeks. In the short-term, rallies should be limited to 1.2680.

One complicating factor is the fact the speculative community are already extremely short EUR. In fact, the IMM data showed net EUR shorts hit the 195k last week –the highest level on record.

All its research is available here.